Thaler's Nobel, Surge Pricing, Fairness, and Long-Term Relationships

Some very nice insights on this theme are woven together in the latest Upshot reporting by Neil Irwin. It shows how Richard Thaler's behavioral economics adds deeper dimension to the debates about surge pricing -- and how that ties to underlying issues of fairness and long-term relationships, beyond the usual conflicting simplistic responses ("not fair"/"sound economics").

My congratulations to Thaler on winning the 2017 Nobel Prize in Economics last week for his work in creating the field of behavioral economics. That is a key foundation for my work on FairPay, and I am very appreciative to have gained his encouragement, as noted below.

When we look beyond the surface, we see that fairness in long-term relationships is what really matters for economics to work well, and that leads to the values (fairness) that we all seek. Thaler developed behavioral economics to look deeply at those deeper issues of human value and behavior. FairPay makes that the center of an new logic for consumer commerce that is badly overdue in our new digital age.

Some relevant quotes from Irwin's article:

For artists, no one show exists in a vacuum. And the things that might maximize revenue for any given night might not be the elements that matter in the longer term in developing devoted fans.

...So one view of the Springsteen approach is that it is economically irrational. But another is that it is part of a long-term relationship between a performer and his fans.

...Utilities and regulators, in other words, have to think a little like Mr. Springsteen: It’s not just about maximizing the efficiency of the energy market on any one day, just as the Boss isn’t trying to maximize his revenue from any one concert. Rather, it’s about maintaining a relationship in which people do not feel like they have been exploited.

...People’s perceptions of what is fair and just are not set in stone; they evolve over time. But companies looking to use variable pricing have to be cognizant of how important it is to respect those perceptions.

...What the successful examples of variable pricing have in common is that they treat customers’ desire for fairness not as some irrational rejection of economic logic to be scoffed at, but something fundamental, hard-wired into their view of the world. It is a reality that has to be respected and understood, whether you’re setting the price for a highway toll, a kilowatt of power on a hot day, or a generator after a hurricane.

“If you treat people in a way they think is unfair, then it will come back and bite you,” Mr. Thaler said. And it doesn’t take a Nobel to understand that.

Numerous posts on this blog address similar underlying issues related to consumer perceptions of price discrimination (including surge pricing) -- and how a more enlightened variation that I call "value discrimination" can be very fair and broadly beneficial to consumers.

I was privileged to get Richard Thaler's attention and encouragement when I wrote to him in 2015 about how nudging is a key aspect of the FairPay strategy, referring to my blog post, How Consumers Can Nudge Corporations for Good (which commented on a piece by him in the NY Times). He then connected me to his colleague, Heather Caruso, executive director of the Center for Decision Research at the University of Chicago Booth School. After some encouraging discussion, she indicated that their center would be interested in possibly being a resource for help in conducting experiments when a company is ready to do a trial.

With regard to trials, businesses, entrepreneurs, researchers, or others who might have interest in applying FairPay or related strategies are invited to contact me for pro-bono assistance. (FairPay is an open architecture in the public domain.)

More detail on how behavioral economics supports the strategies that underlie FairPay is in my earlier post, Thinking Fast and Slow about FairPay: A New Psychology for Commerce in a Networked Age, and in Making Customers Want to Pay You -- Research on How FairPay Changes the Game. (I previously had brief interchanges with Daniel Kahneman, the first winner of a Nobel for related work in behavioral economics, and author of Thinking Fast and Slow.)

We are just beginning to see the real world results of the more human side of economics that Kahneman, Tversky, and Thaler shined their light on.

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.

(FairPay is an open architecture, in the public domain.)

How Market Commerce Can Become More Cooperative, Fair, and Human

A recent conference on Platform Cooperativism spurred some thoughts on how FairPay offers a path toward a new convergence of traditional ideas about market capitalism and alternative ideas about a "Fairness Economy." (This conference drew added attention from a Wired article about the idea that Twitter should become a co-op, "Let's Build the Next Twitter Like the Green Bay Packers.")

In exploring the concepts of a more win-win approach to commerce called FairPay, I have seen a spectrum of thinking about market capitalism and its limitations as currently practiced, and how to make our economy more in tune with human social values.

• Market capitalism has created our modern world, and proven efficient, productive, and scalable -- despite a degree of blindness to human values. 
• That has led to growing concerns about income inequality, slowing productivity gains, and concentration of power in corporations and investors, spawning a wide range of movements to change the game. These range from
  1) incremental steps like "Corporate Social Responsibility," "Creating Shared Value," and "Triple Bottom Lines," to
  2) benefit corporations and other more softly profit-oriented structures, and to
  3) more sharply different forms of organization like cooperatives (and other non-profits).
• The conference focused on cooperatives, a form of business that has existed for centuries, and harnesses the same spirit as Open Source and Peer Production, and that can now build on the openness of the Internet to put ownership of a business in the hands of its workers and/or customers.
• All of this occurred with a backdrop of the US election, which highlighted deep concerns about an economy that no longer seems to be serving middle- and working-class people well -- a hard push for change, but one with little consensus as to what kind of change can or should be achieved. 

Meanwhile, most businesses may still be far from meaningful social consciousness in their operational core, but increasing numbers do try to tack on some efforts at "good corporate citizenship." Some would argue this is just lipstick on a pig, but others see real potential to make existing businesses much better.

Hints of convergence -- human-centered marketing

The gulf may seem huge, but deep in the heart of modern marketing, a more direct incentive to being more fair and human is emerging. Companies are realizing that in this networked age, their most important customer relationships are ongoing, and that loyalty and Customer Lifetime Value (CLV) are more important than immediate sales. Companies are beginning to see that Customer Experience (CX) is central, and that they must attend at every touch-point to creating desirable Customer Journeys that build Loyalty Loops to cultivate their best customers. (Forrester recently reported that CX leaders grew at 17% per year compared to 3% for CX laggards.) This re-orientation is starting to drive companies toward deeper, more personalized dialog with their customers and more human, cooperative values.

How FairPay changes the game

FairPay enables a shift in business operations to focus on a more cooperative "co-creation" of value that improves the bottom line. That can help bridge the gap between these two very different models, by making ordinary for-profit corporations more aligned with their customers and what they value -- including human values of people and planet.

The magic of FairPay is that it can be applied in any of these ownership structures. It can work very nicely in alternative structures like co-ops, but can also work as a core operational process in ordinary for-profit businesses. It drives everyday business operations to center on the human values of each customer, in a way that makes it profitable to "do the right thing." No tacking on extra bottom lines, or a veneer of social responsibility, that compete with profit motives. FairPay serves as a kind of cooperative judo that aligns the profit motive with what the customer wants. If the customer is an owner (as with a co-op), that just adds to the alignment.

FairPay provides a structure for building relationships around value, by giving consumers limited power to set prices that correspond to the value they receive -- for as long as the seller considers them to be fair about how they do that (but not longer). This creates a balance of powers (setting prices / continuing the relationship) that rewards cooperation. It changes commerce from largely independent one-time games that are inherently zero-sum, to a repeated game that adaptively seeks win-win co-creation of value.

A new lens on market fairness

So with this new lens of FairPay -- and how it works in any kind of business to fundamentally change customer relationships into a repeated game of cooperative relationship building -- a new path becomes clear.

From one side of the divide, if we use FairPay in conventional businesses, we don't need any new enterprise structures (or any new enterprises) to start with.

• Conventional corporations can introduce FairPay into their ongoing operations, as an alternative pricing option -- one that drives a new kind of cooperation between a business and its customers (and they can start to do this in limited, controlled market segments).
• This cooperation focuses on win-win value propositions based on structured dialogs about value that can include broad aspects of value, including "externalities" of people and planet that are typically ignored by our markets (but directly affect the bottom line when FairPay pricing is applied).
• That in itself should improve things for customers, workers, stockholders, and society at large.

At the same time, we can build from the other side and create new platform cooperatives (or other new models in that vein). They show considerable promise, and FairPay can add to that promise.

• The same kind of cooperative dialogs about value that FairPay creates in a for-profit business can be applied by a co-op or other non-profit or hybrid form, with the same benefits.
• Such methods can be expected to be especially effective in such contexts, because of the deeper alignment of values on the part of the alternative business, and the greater willingness to pay of consumer "cooperators" when the business entity is theirs. (More on this in an earlier post, A Better Revenue Strategy for Non-Profits in the Digital Era.)

Thus FairPay offers a common operational logic that can serve as a bridge toward convergence from both sides, wherever along the spectrum we are.

• Conventional businesses can become more cooperative and aligned with customer and social values, and help instill more cooperative behavioral norms in themselves and their customers -- even in a for-profit, capitalist context. 
• That sets the stage for further shifts toward cooperation in for-profits -- as well as a more fertile environment for alternative structures.
• Likewise, alternative structures (non-profits or hybrids) can benefit from the fair and efficient FairPay pricing process that is more attractive and more self-sustaining than conventional pricing. The power of FairPay may be even greater in such alternative structures -- even if such structures are not as operationally efficient as profit-driven structures in some respects, FairPay might enable them to achieve greater price-efficiency to offset that, drawing on their more inherently mutual incentive structure.

Both camps can coexist and seek to flourish as they are able, and each can help drive the growth of an ecosystem that benefits all productive players, as well as society at large. Whatever mix it is that flourishes in any given context, and any point in time, we all can win with FairPay.

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For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).

Even better, read my highly praised new book: FairPay: Adaptively Win-Win Customer Relationships.  
coop

Price Discrimination for the Good!

"Higher prices in an affluent area help bring healthier meals to a poor neighborhood" reads the teaser for an interesting NYTimes article, which goes on to report on a 2:1 difference in prices between two Everytable restaurants only two miles apart in LA:

The big price difference represents an unusual experiment to address the persistent issue of limited food choices in poorer neighborhoods around the country. The higher prices at the downtown store are effectively meant to offset smaller profits at the other location, making the lower-priced restaurant more economically viable.

The article includes comments from advisory firm partner Michael Kaufman:

To make it work, he said people would need to understand why prices are higher in one neighborhood than in another. ...“I think the key to it will be how they tell their story” 

FairPay applies similar logic -- in a more dynamically adaptive, emergent process -- to set prices based on an individual "invisible handshake" that applies a balance of powers to learn what value customers receive, and factor in their ability to pay to determine the fair share they should contribute the the profits that sustain a business. This was explained in my earlier post Price Discrimination Can Be Good!, which was triggered by the equally interesting, if less noble, example of Uber surge pricing.

One key point is that price discrimination is not inherently evil, as it is often viewed. It depends on how and why it is done:

• When price discrimination is done unilaterally by sellers, to extract maximum profit with no buy-in from customers it can be bad -- especially if done secretly in a way that is exploitative.
• When it is done with transparency and customer buy-in, based equitably on differentials in ability to pay and value received, it can be laudable, and customers can feel good about it.  

What matters is the openness and fairness of the process. As Kaufman said, "the key to it will be how they tell their story.”

This relates to the broader issue of the growing call for a more socially conscious capitalism, a "fairness economy." We want the efficiency of free markets, but with an awareness of social values and bottom lines that factor in people and planet. Many are seeking ways to to achieve that. FairPay points to a new and more powerful solution.

FairPay's invisible handshake is not just a feel-good image, but an operational process based on a specific balance of powers that shapes the "story" -- a process of dialog that gives pricing power to customers, but only as long as they use it in a way the seller agrees is fair. FairPay can be applied in a wide range of contexts, from those that today lack much social context (like TV), through those that have stronger social context (like journalism and indie music), to those with dominating social context (like non-profits and charities).

Engaging customers, telling the story, and building long-term relationships based on this invisible handshake promises to increase Lifetime Customer Value, to offer more profit, greater market share -- and more total value to society.

For a full introduction to FairPay see the Overview and the sidebar on How FairPay Works (just to the right, if reading this at FairPayZone.com). There is also a guide to More Details (including links to a video).